Notes to the Unaudited Condensed Consolidated Financial Statements
1. Nature of Business and Liquidity
The terms "MBI" or "the Company", "we", "our", and "us" are used herein to refer to Moleculin Biotech, Inc. MBI is a clinical-stage pharmaceutical company, organized as a Delaware corporation in July 2015, with its focus on the treatment of highly resistant cancers via the development of its oncology drug candidates, all of which are based on license agreements with The University of Texas System on behalf of the M.D. Anderson Cancer Center, which we refer to as MD Anderson. MBI formed Moleculin Australia Pty. Ltd., (MAPL), a wholly owned subsidiary in June 2018, to begin preclinical development in Australia for WP1732, an analog of WP1066. This enables the Company to enjoy the benefits of certain research and development tax credits in Australia. In February 2019, the Company entered into an agreement with Animal Life Sciences, LLC ("ALI"), where the Company has granted a sublicense to ALI to research, develop, make, have made, use, offer to sell, sell, export or import and commercialize certain licensed products for non-human use and share development data. ALI issued to the Company a 10% interest in ALI. ALI converted into a corporation and became Animal Life Sciences, Inc.
Core Technologies - MBI has three core technologies with six drug candidates, all of which are based on discoveries made at MD Anderson. These core technologies are 1) Annamycin, 2) its STAT3 Immune/Transcription Modulators, or simply "Immune/Transcription Modulators" WP1066 portfolio and 3) its Metabolism/Glycosylation Inhibitor portfolio, WP1122. The Company’s clinical stage drugs are Annamycin, an anthracycline being studied for the treatment of relapsed or refractory acute myeloid leukemia, or AML and WP1066, an Immune/Transcription Modulator targeting brain tumors, pancreatic cancer and AML. We have completed full enrollment and begun treating patients with WP1220, an analog of WP1066, for the topical treatment of cutaneous T-cell lymphoma ("CTCL"), a form of skin cancer, in a clinical trial approved by Polish regulators in January 2019. MBI is also engaged in preclinical development of additional drug candidates, including other Immune/Transcription Modulators, as well as Metabolism/Glycosylation Inhibitors. With the approval of the Polish clinical trial in January 2019 for WP1220 for the treatment of CTCL, the Company now has three drugs in four clinical trials.
The Company believes Annamycin is a "Next Generation Anthracycline" since it is designed to avoid the multidrug resistance mechanisms that typically defeat currently approved anthracyclines, as well as to be non-cardiotoxic, which is the dose limiting toxicity of all currently approved anthracyclines. Annamycin is currently in two Phase I/II clinical trials, and preliminary clinical data suggests that it may have the potential to become the first therapy suitable for the majority of relapsed or refractory AML patients regardless of gene mutations. Additionally, preclinical research in animal models at MD Anderson demonstrated that Annamycin is able to significantly improve survival in an aggressive form of triple negative breast cancer metastasized to the lungs. Coupled with research demonstrating that Annamycin is capable of accumulating in the lungs at very high levels, this suggests that Annamycin may be well suited to become a treatment for lung-localized tumors.
WP1066 is one of several Immune/Transcription Modulators that appear capable of stimulating immune response to tumors by inhibiting the errant activity of Regulatory T-Cells ("TRegs") while also inhibiting key oncogenic transcription factors, including p-STAT3, c-Myc and HIF-1α. These transcription factors are widely sought targets that may also play a role in the lack of efficacy of immune checkpoint inhibitors in certain resistant tumors.
The Company is also developing new prodrugs to exploit the potential uses of inhibitors of glycolysis and glycosylation. Its lead Metabolism/Glycosylation Inhibitor compound, WP1122, provides an opportunity to cut off the fuel supply of tumors by taking advantage of their overdependence on glucose as compared with healthy cells. New research also points to the potential for the glucose decoy ("2-DG") within WP1122 to be capable of enhancing the usefulness of checkpoint inhibitors.
Drug Candidates - Within the Company's core technologies, it currently has six drug candidates representing three substantially different approaches to treating cancer. Annamycin is a chemotherapy designed to inhibit the replication of DNA of rapidly dividing cells and is the Company's most mature drug candidate. Annamycin had been in clinical trials pursuant to an investigational new drug application or IND that had been filed with the FDA. Due to a lack of development activity by a prior drug developer, this IND was terminated. To permit the renewed investigation of Annamycin, the Company resubmitted a new IND for a Phase I/II trial for the treatment of relapsed or refractory AML in August 2017, which the FDA allowed to go into effect in September 2017. The Company has trials open in the US and Poland and is actively recruiting in both countries.
The Company has five other drug development projects, two of which are also in clinical trials:
•WP1066 has an approved physician-sponsored clinical trial open for enrollment and dosing patients for the treatment of brain tumors and is also being evaluated for another physician-sponsored clinical trial for the potential treatment of pediatric brain tumors, as well as AML and pancreatic cancer,
•WP1220 is an analog of WP1066 for which Polish authorities in January 2019 approved the Company's Clinical Trial Application ("CTA") to study the topical treatment of CTCL, which study reached full enrollment in August 2019,
•WP1732, another analog of WP1066, is being evaluated along with WP1066 for the potential treatment of AML, pancreatic and other cancers, and MBI has begun pre-clinical work that it expects to generate sufficient data for an IND for an intravenous formulation of one of its STAT3 inhibitors, which filing is expected to be submitted in 2021, and
•WP1122 and WP1234 are being evaluated for their potential to treat brain tumors and pancreatic cancer via their ability to inhibit glycolysis.
Clinical Trials - The Company believes that patient recruitment for its Annamycin clinical trial in the US has been slow due to the high number of competitive clinical trials, combined with the FDA’s requirement to set the initial dose level relatively low in comparison with previous Annamycin clinical trials. Additionally, the Company believes that patient recruitment for its clinical trial in Poland has been more successful than in the US due to a comparatively lower number of competitive clinical trials and the protocol there being approved to start at a significantly higher dose than in the US with fewer enrollment screening limitations.
In September 2018, the physician sponsored WP1066 Phase I clinical trial for the treatment of glioblastoma and melanoma metastasized to the brain, which opened for recruitment in July 2018, began treating patients.
In August 2019, the Company completed full enrollment in a proof-of-concept clinical trial in Poland to study WP1220, a part of the WP1066 portfolio, for the treatment of CTCL. Polish authorities approved the Company's CTA for this use in January 2019, and the trial began enrolling patients in March 2019.
Licenses - The Company has been granted royalty-bearing, worldwide, exclusive licenses for the patent and technology rights related to all of MBI's drug technologies, as these intellectual property rights are owned in part or entirely by MD Anderson. The Annamycin drug substance is no longer covered by any existing patent protection, however, the Company filed new patent applications in July 2019 for formulation, synthetic process and reconstitution related to MBI's Annamycin drug product candidate, although there is no assurance that the Company will be successful in obtaining such patent protection. Such technology is also licensed from MD Anderson. Independently from potential patent protection, MBI has received Orphan Drug designation ("ODD") from the FDA for Annamycin for the treatment of AML and for WP1066 for the treatment of glioblastoma. ODD may provide tax and other benefits during product development, and if either product is approved, may lead to a grant of seven-year market exclusivity. Under that exclusivity, which runs from the date of the approval of the New Drug Application ("NDA") in the United States, the FDA generally (there are important exceptions) could not approve another product containing the same drug for the designated indication. The Company also intends to apply for similar status in the European Union ("EU") where market exclusivity could extend to 10 years from the date of Marketing Authorization Application ("MAA") approval. Separately, the FDA may also grant market exclusivity of 5 years for newly approved new chemical entities (which the Company believes Annamycin would be one), which would preclude approval of any other annamycin product, but there can be no assurance that such exclusivity will be granted. In April 2019, FDA approved the Company's request for Fast Track Designation for Annamycin for the treatment of relapsed or refractory AML. Fast Track Designation, the purpose of which is to expedite drug development and approval, is granted to drugs intended to treat serious conditions and where data demonstrate the potential to address an unmet medical need.
Moleculin, LLC - Prior to MBI's initial public offering, the Company acquired Moleculin, LLC which was merged with and into MBI. Moleculin, LLC was the holder of a license agreement with MD Anderson covering technology referred to as the WP1066 Portfolio, which is focused on the modulation of key oncogenic transcription factors.
2. Basis of presentation, principles of consolidation and significant accounting policies
Basis of Presentation – Unaudited Interim Condensed Consolidated Financial Information - The accompanying unaudited interim condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for financial information, and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements furnished reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a
fair statement of results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These interim condensed unaudited consolidated financial statements should be read in conjunction with the audited financial statements of the Company as of December 31, 2018 and December 31, 2017 and notes thereto contained in the Form 10-K filed with the SEC on February 21, 2019.
Principles of consolidation - The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation. Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP. The company views its operations and manages its business in one operating segment. All long-lived assets of the Company reside in the United States.
Use of Estimates - The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including: expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. This process may result in actual results differing materially from those estimated amounts used in the preparation of financial statements. Estimates are used in the following areas, among others: fair value estimates on intangible assets, warrants, and stock-based compensation expense, as well as accrued expenses and taxes.
Going Concern - These condensed consolidated financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The continuation of the Company as a going concern is dependent upon the ability of the Company to obtain necessary equity financing to continue operations and the attainment of profitable operations. As of September 30, 2019, the Company has incurred an accumulated deficit of $35.8 million since inception and had not yet generated any revenue from operations. Additionally, management anticipates that its cash on hand as of September 30, 2019, is sufficient to fund its planned operations into but not beyond the near term. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These unaudited condensed consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company may seek additional funding through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements, other collaborations, strategic alliances and licensing arrangements and delay planned cash outlays or a combination thereof. Management cannot be certain that such events or a combination thereof can be achieved.
Cash and Cash Equivalents - The Company considers all highly liquid accounts with original maturities of three months or less at the date of acquisition to be cash equivalents. Periodically in the ordinary course of business, the Company may carry cash balances at financial institutions in excess of the Federally insured limits of $250,000.
Prepaid Expenses and Other Current Assets - Prepaid expenses and other current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Vendor prepayments and deposits
|
$
|
1,994
|
|
|
|
$
|
238
|
|
|
Prepaid insurance
|
560
|
|
|
171
|
|
|
Non-trade receivables
|
316
|
|
|
56
|
|
|
Other
|
307
|
|
|
375
|
|
|
Total prepaid expenses and other current assets
|
$
|
3,177
|
|
|
|
$
|
840
|
|
Vendor prepayments includes approximately $1.7 million for the expansion of Annamycin production commitments on a commercial scale to be delivered in 2020, which will be used in clinical trials.
Intangible Assets - Intangible assets with finite lives are amortized using the straight-line method over their estimated period of benefit. If an intangible asset is identified as an in-process research & development ("IPR&D") asset, then no
amortization will occur until the development is complete. If the associated research and development effort is abandoned, the related assets will be written-off and the Company will record a noncash impairment loss on its statements of operations. For those compounds that reach commercialization, if any, the IPR&D assets will be amortized over their estimated useful lives.
The Company evaluates the recoverability of intangible assets periodically and takes into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. No material impairments of intangible assets have been identified during any of the periods presented. Intangible assets are tested for impairment on an annual basis, and between annual tests if the Company believes indicators of potential impairment exist, using a fair-value-based approach.
Property and Equipment, net - Leasehold improvements, furniture, equipment and software are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining lease term. Accumulated depreciation on property and equipment was $0.2 million at September 30, 2019, and $0.1 million at December 31, 2018.
Operating Lease Right-of-Use Asset - The Company determines if an arrangement is a lease at contract inception or during modifications or renewal of an existing lease. Operating lease assets represent the Company's right to use an underlying asset for the lease term and operating lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date of the lease based upon the present value of lease payments over the lease term. The lease payments used to determine the Company's operating lease assets may include lease incentives, stated rent increases and escalation clauses linked to rates of inflation when determinable and are recognized in the Company's operating lease assets in the Company's condensed consolidated balance sheet. The Company has elected the practical expedient and will not separate lease components from nonlease components for its leases. The Company's operating leases are reflected in operating lease right-of-use asset ("ROU"), accrued expenses and current liabilities, and operating lease liability - long-term in the Company's condensed consolidated balance sheets. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Short-term leases, defined as leases that have a lease term of 12 months or less at the commencement date, are excluded from this treatment and are recognized on a straight-line basis over the term of the lease. Refer to Note 7 - Commitments and Contingencies - Lease Obligations Payable for additional information related to the Company’s operating leases.
Cost Method Investment - Our cost method investment consists of an investment in a private company in which we do not have the ability to exercise significant influence over its operating and financial activities. The investment is tested for impairment quarterly.
Fair Value of Financial Instruments - The Company's financial instruments consist primarily of non-trade receivables, account payables, accrued expenses and a warrant liability. The carrying amount of non-trade receivables, accounts payables, and accrued expenses approximates their fair value because of the short-term maturity of such.
The Company has categorized its assets and liabilities that are valued at fair value on a recurring basis into a three-level fair value hierarchy in accordance with U.S. GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3).
Assets and liabilities recorded in the balance sheets at fair value are categorized based on a hierarchy of inputs as follows:
Level 1 – Unadjusted quoted prices in active markets of identical assets or liabilities.
Level 2 – Quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 – Unobservable inputs for the asset or liability.
The Company’s financial assets and liabilities recorded at fair value on a recurring basis include the fair value of warrant liability discussed in Note 4. In the accompanying interim condensed consolidated financial statements as of September 30, 2019, the fair value of this warrant liability is included in current liabilities for the February 2017 Issuance of Warrants, the February 2018 Issuance of Warrants, the June 2018 Issuance of Warrants, the March 2019 Issuance of Warrants, and the April 2019 Issuance of Warrants. Warrant liabilities will be shown as a current liability on the balance sheet when it is deemed more probable than not by management to be exercised within one year.
The following table provides assets and liabilities reported at fair value and measured on a recurring basis at September 30, 2019 and at December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Liabilities
Measured at Fair
Value
|
|
Quoted Prices
in Active
Markets for
Identical
Assets (Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant Other
Unobservable Inputs
(Level 3)
|
|
Fair value of warrant liability as of September 30, 2019:
|
|
$
|
6,820
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,820
|
|
|
Fair value of warrant liability as of December 31, 2018:
|
|
$
|
1,508
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,508
|
|
The table below (in thousands) of Level 3 liabilities begins with the valuation as of the beginning of the third quarter and then is adjusted for the issuances and exercises that occurred during the third quarter of 2019 and adjusts for balances for changes in fair value that occurred during the current quarter. The ending balance of the Level 3 financial instrument presented above represents our best estimates and may not be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
Warrant Liability Current
|
|
Warrant Liability Long-Term
|
|
Warrant Liability Total
|
|
Balance, June 30, 2019
|
$
|
6,944
|
|
|
$
|
—
|
|
|
$
|
6,944
|
|
|
Reclass of liability from long-term to current
|
—
|
|
|
—
|
|
|
—
|
|
|
Exercise of warrants
|
—
|
|
|
—
|
|
|
—
|
|
|
Issuances of warrants
|
—
|
|
|
—
|
|
|
—
|
|
|
Change in fair value - net
|
(124)
|
|
|
—
|
|
|
(124)
|
|
|
Balance, September 30, 2019
|
$
|
6,820
|
|
|
$
|
—
|
|
|
$
|
6,820
|
|
The table below (in thousands) of Level 3 liabilities begins with the valuation as of December 31, 2018 and then is adjusted for the issuances and exercises, and changes in fair value that occurred during the nine months ended September 30, 2019. The ending balance of the Level 3 financial instrument presented above represents our best estimates and may not be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
Warrant Liability Current
|
|
Warrant
Liability
Long-Term
|
|
Warrant
Liability
Total
|
|
Balance, December 31, 2018
|
|
$
|
180
|
|
|
$
|
1,328
|
|
|
$
|
1,508
|
|
|
Reclass of liability from long-term to current
|
|
1,328
|
|
|
(1,328)
|
|
|
—
|
|
|
Exercise of warrants
|
|
(3,174)
|
|
|
—
|
|
|
(3,174)
|
|
|
Issuances of warrants
|
|
11,545
|
|
|
—
|
|
|
11,545
|
|
|
Change in fair value - net
|
|
(3,059)
|
|
|
—
|
|
|
(3,059)
|
|
|
Balance, September 30, 2019
|
|
$
|
6,820
|
|
|
$
|
—
|
|
|
$
|
6,820
|
|
Loss Per Common Share - Basic net loss per common share is computed by dividing net loss available to common shareholders by the weighted-average number of common shares outstanding during the period. For purposes of this calculation, options to purchase common stock, restricted stock subject to vesting and warrants to purchase common stock were considered to be common stock equivalents. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be antidilutive. For the three months ended September 30, 2019 and 2018,
approximately 14.7 million and approximately 6.5 million, respectively, of potentially dilutive shares were excluded from the computation of diluted earnings per share due to their antidilutive effect. For the nine months ended September 30, 2019 and 2018, approximately 11.3 million and approximately 5.0 million, respectively, of potentially dilutive shares were excluded from the computation of diluted earnings per share due to their antidilutive effect.
Reclassifications - A reclassification was made to the prior period financial statements to conform to the 2019 presentation. Such reclassification did not affect net loss as previously reported. Historically, "Deferred compensation - related party" was a separate line item on the balance sheet. Management believes that this balance is best shown included in "accrued expenses and other current liabilities," and, as such, a reclassification was made to the balance sheet for the period ended December 31, 2018 to include "deferred compensation - related party" in with "accrued liabilities and other current liabilities." Additionally, interim disclosures pertaining to stockholders' equity are shown for current and comparative year-to-date periods, with subtotals for each interim period.
Subsequent Events - The Company’s management reviewed all material events through the date these unaudited condensed consolidated financial statements were issued for subsequent events disclosure consideration, see Note 8 - "Subsequent Events".
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. In July 2018, the FASB issued ASU No. 2018-11, Leases Targeted Improvements ("ASU 2018-11"). In March 2019, the FASB issued ASU. No. 2019-01, Leases ("ASU 2019-01"). ASU 2019-01 and 2018-11 assists stakeholders with implementation questions and issues as organizations prepare to adopt the new leases standard. The Company adopted this standard on January 1, 2019 and used the effective date of initial application using the modified retrospective transition method. Upon adoption there was no cumulative-effect adjustment to the opening balance of retained earnings as of January 1, 2019. Therefore, prior period financial information has not been adjusted and continues to be reflected in accordance with the Company's historical accounting policy. The standard establishes a ROU asset model that requires the lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. (see Note 7. Commitments and Contingencies - Lease Obligations Payable).
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718) Improvements to Non-employee Share-Based Payment Accounting ("ASU 2018-07"). ASU 2018-07 affects all entities that enter into share-based payment transactions for acquiring goods and services from non-employees. The amendments in this ASU expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption permitted, but no earlier than an entity's adoption date of Topic 606. The adoption of this pronouncement did not have a material impact on the Company's condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) ("ASU 2018-13"). ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of this ASU. The Company is currently evaluating the impact that this standard will have, if any, on its financial statements.
The Company does not believe that any other recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying condensed consolidated financial statements.
3. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Accrued clinical testing
|
|
$
|
349
|
|
|
$
|
95
|
|
|
Accrued payroll and bonuses
|
|
249
|
|
|
492
|
|
|
Accrued other
|
|
144
|
|
|
227
|
|
|
Accrued legal and professional fees
|
|
137
|
|
|
91
|
|
|
Operating lease liability - current
|
|
100
|
|
|
—
|
|
|
Accrued license fees and sponsored research agreements
|
|
91
|
|
|
1,147
|
|
|
Accrued drug manufacturing costs
|
|
41
|
|
|
400
|
|
|
Total accrued expenses and other current liabilities
|
|
$
|
1,111
|
|
|
$
|
2,452
|
|
4. Warrant Liability
As of September 30, 2019, the Company had 10,256,193 warrants outstanding consisting of 5,250,000 warrants issued in April 2019; 1,585,500 warrants issued in March 2019; 742,991 warrants issued in June 2018; 2,273,700 warrants issued in February 2018; and 404,002 warrants issued in February 2017.
A summary of the Company's warrant activity during the nine months ended September 30, 2019 and related information follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares Under Warrant
|
|
Range of Warrant Exercise Price per Share
|
|
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
Balance at January 1, 2019
|
3,426,711
|
|
|
$
|
1.50
|
|
|
$
|
2.80
|
|
|
$
|
2.48
|
|
|
4.53
|
|
Granted
|
8,242,500
|
|
|
$
|
1.10
|
|
|
$
|
1.75
|
|
|
$
|
1.51
|
|
|
—
|
|
|
Exercised
|
(1,413,018)
|
|
|
$
|
1.10
|
|
|
$
|
1.50
|
|
|
$
|
1.10
|
|
|
—
|
|
|
Expired
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
Balance at September 30, 2019
|
10,256,193
|
|
|
$
|
1.10
|
|
|
$
|
2.80
|
|
|
$
|
1.89
|
|
|
4.29
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Exercisable at September 30, 2019
|
10,256,193
|
|
|
$
|
1.10
|
|
|
$
|
2.80
|
|
|
$
|
1.89
|
|
|
4.29
|
As discussed in Note 5, in connection with the offering that closed on April 25, 2019, the Company issued warrants to purchase 4,687,500 shares of its common stock (each a "Warrant"). The warrants are immediately exercisable at a price of $1.75 per share and expire five years from the date of issuance. In connection with the offering, the Company issued Oppenheimer & Co. Inc. a warrant (the "Underwriter Warrant") to purchase up to 562,500 shares of its common stock with an exercise price of $1.75 per share. The Underwriter Warrant expires on April 23, 2024.
As discussed in Note 5, in connection with the offering that closed on March 29, 2019, the Company issued warrants to purchase 2,625,000 shares of its common stock (each a “Warrant”). The warrants are immediately exercisable at a price of $1.10 per share, subject to adjustment in certain circumstances, and expire five years from the date of issuance. In connection with the offering, the Company issued Oppenheimer & Co. Inc. a warrant (the “Underwriter Warrant”) to purchase up to 367,500 shares of its common stock with an exercise price of $1.10 per share. The Underwriter Warrant expires on March 27, 2024.
The basis of value of the warrant liability is fair value, which is defined pursuant to Accounting Standards Codification (“ASC”) 820 to be “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. The Company uses the Black-Scholes option pricing model (“BSM”) to determine the fair value of its remaining warrants outstanding.
The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds linearly interpolated to obtain a maturity period commensurate with the term of the warrants.
Estimated volatility is a measure of the amount by which the Company's stock price is expected to fluctuate each year during the expected life of the warrants. Where appropriate, the Company used the historical volatility of peer entities combined with the Company's due to the lack of sufficient historical data of its stock price during the years 2017 to 2019.
The assumptions used in the BSM models for its outstanding warrants are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
Risk-free interest rate
|
1.55
|
%
|
to
|
1.60
|
%
|
|
2.46
|
%
|
to
|
2.51
|
%
|
|
Volatility
|
90.00
|
%
|
to
|
97.50
|
%
|
|
75.00
|
%
|
to
|
80.00
|
%
|
|
Expected life (years)
|
2.37
|
to
|
4.57
|
|
3.12
|
to
|
4.98
|
|
Dividend yield
|
—%
|
|
|
|
|
—%
|
|
|
|
5. Equity
The Company is authorized to issue 105,000,000 shares of which 5,000,000 shares of preferred stock are authorized and 100,000,000 shares of common stock are authorized.
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of preferred stock. Its certificate of incorporation authorizes the board to issue these shares in one or more series, to determine the designations and the powers, preferences and relative, participating, optional or other special rights and the qualifications, limitations and restrictions thereof, including the dividend rights, conversion or exchange rights, voting rights (including the number of votes per share), redemption rights and terms, liquidation preferences, sinking fund provisions and the number of shares constituting the series. As of September 30, 2019, there was no preferred stock issued.
Common Stock
Lincoln Park Transaction
On October 4, 2018, the Company entered into a purchase agreement (the "Purchase Agreement") and a registration rights agreement (the "Registration Rights Agreement") with Lincoln Park Capital Fund, LLC ("Lincoln Park"). Pursuant to the terms of the Purchase Agreement, Lincoln Park has agreed to purchase from the Company up to $20.0 million of our common stock (subject to certain limitations) from time to time during the term of the Purchase Agreement. Pursuant to the terms of the Registration Rights Agreement, the Company filed with the SEC a registration statement to register for resale under the Securities Act the shares that have been or may be issued to Lincoln Park under the Purchase Agreement. Pursuant to the terms of the Purchase Agreement, at the time the Company signed the Purchase Agreement and the Registration Rights Agreement, the Company issued 243,013 shares of common stock to Lincoln Park as consideration for its commitment to purchase shares of our common stock under the Purchase Agreement and the Company may issue an additional 121,507 commitment shares pro-rata when and if Lincoln Park purchases (at the Company's discretion) the $20.0 million aggregate commitment. The commitment shares were valued at $337,788, recorded as an addition to equity for the issuance of common stock and treated as a reduction to equity as a cost of capital to be raised under the Purchase Agreement. During the three months ended December 31, 2018, the Company issued 1,399,153 shares to Lincoln Park which included 10,918 commitment shares, for $1.8 million. During the first quarter of 2019, the Company issued 605,367 shares, which included 5,367 commitment shares for $0.9 million. No shares were issued to Lincoln Park during the second quarter of 2019. During the third quarter of 2019, the Company issued 100,674 shares to Lincoln Park which included 674 commitment shares, for $0.1 million.
At Market Issuance Sales Agreements ("ATM")
In September 2017, the Company entered into an At Market Issuance Sales Agreement (the “ATM Agreement”) with Roth Capital Partners, LLC ("Roth") and National Securities Corporation ("National") (collectively, the “Agents”). Pursuant to the terms of the ATM Agreement, the Company was permitted to sell from time to time through the Agents shares of the Company’s common stock with an aggregate sales price of up to $13 million. The Company agreed to pay a commission to the Agents of 3.0% of the gross proceeds of the sale of the shares sold under the Agreement and to reimburse the Agents for certain expenses. The Company also provided the Agents with customary indemnification rights. In June 2019, the Company canceled the ATM Agreement. The Company did not sell any shares under this ATM Agreement in 2019.
Subsequent to canceling the ATM Agreement with Roth and National, the Company entered into an At Market Issuance Sales Agreement (the “Opco Agreement”) with Oppenheimer & Co. Inc. (the “Agent”) on July 23, 2019. Pursuant to
the terms of the Opco Agreement, the Company may sell from time to time through the Agent shares of the Company’s common stock, with an aggregate sales price of up to $15 million (the “Shares”). Any sales of Shares pursuant to the Opco Agreement will be made under the Company’s effective “shelf” registration statement (the “Registration Statement”) on Form S-3 (File No. 333-219434), which became effective on August 21, 2017 and the related prospectus supplement and the accompanying prospectus, as filed with the Securities and Exchange Commission (the “SEC”). Under the Opco Agreement, the Company may sell Shares through the Agent by any method that is deemed an “at the market offering” as defined in Rule 415 under the Securities Act of 1933, as amended. Sales of the Shares, if any, may be made at market prices prevailing at the time of sale, subject to such other terms as may be agreed upon at the time of sale, including a minimum sales price that may be stipulated by the Company’s Board of Directors or a duly authorized committee thereof. The Company or the Agent, under certain circumstances and upon notice to the other, may suspend the offering of the Shares under the Agreement. The offering of the Shares pursuant to the Agreement will terminate upon the sale of Shares in an aggregate offering amount equal to $15 million, or sooner if either the Company or the Agent terminate the Agreement pursuant to its terms. The Company will pay a commission to the Agent of 3.0% of the gross proceeds of the sale of the Shares sold under the Agreement and reimburse the Agent for certain expenses. The Company has also provided the Agent with customary indemnification rights. The Company has not sold any shares under the Opco Agreement.
Adoption of 2015 Stock Plan
In 2015, the Board of Directors of the Company approved the Company’s 2015 Stock Plan, which was amended in 2017 and 2018. The expiration date of the plan is December 5, 2025 and the total number of underlying shares of the Company’s common stock available for grant to employees, directors and consultants under the plan is currently 4,500,000 shares. The awards under the 2015 Stock Plan can be in the form of stock options, stock awards, stock unit awards or stock appreciation rights.
The following table summarizes stock option activity for the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
Weighted Average Grant Date Fair Value
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
|
Aggregate Intrinsic Value
|
|
Outstanding, December 31, 2018
|
|
2,794,000
|
|
|
$
|
1.78
|
|
|
$
|
2.61
|
|
|
9.43
|
|
$
|
21,200
|
|
|
Granted
|
|
1,115,000
|
|
|
$
|
1.04
|
|
|
$
|
1.30
|
|
|
|
|
|
|
Exercised
|
|
(25,000)
|
|
|
$
|
0.13
|
|
|
$
|
0.20
|
|
|
|
|
|
|
Forfeited
|
|
(103,000)
|
|
|
$
|
1.29
|
|
|
$
|
1.82
|
|
|
|
|
|
|
Outstanding, September 30, 2019
|
|
3,781,000
|
|
|
$
|
1.60
|
|
|
$
|
2.28
|
|
|
8.61
|
|
$
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2019
|
|
993,083
|
|
|
$
|
2.28
|
|
|
$
|
3.42
|
|
|
7.79
|
|
$
|
—
|
|
The fair value of the option grants has been estimated, with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
Risk-free interest rate
|
1.04
|
%
|
to
|
1.30
|
%
|
|
0.95
|
%
|
to
|
2.24
|
%
|
|
Volatility
|
85
|
%
|
to
|
100
|
%
|
|
70
|
%
|
to
|
89
|
%
|
|
Expected life (years)
|
5.31
|
to
|
6.25
|
|
5
|
to
|
6.25
|
|
Expected dividend yield
|
—%
|
|
|
|
|
—%
|
|
|
|
Stock-based compensation for the three and nine months ended September 30, 2019 and 2018, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
General and administrative
|
$
|
430
|
|
|
$
|
207
|
|
|
$
|
1,003
|
|
|
$
|
709
|
|
|
Research and development
|
59
|
|
|
37
|
|
|
152
|
|
|
116
|
|
|
Total
|
$
|
489
|
|
|
$
|
244
|
|
|
$
|
1,155
|
|
|
$
|
825
|
|
During the nine months ended September 30, 2019, 1,115,000 stock options were granted. Options granted during 2019 have an aggregated fair value of $1.2 million which was calculated using the Black-Scholes option-pricing model. As of September 30, 2019, total compensation cost not yet recognized was $3.2 million and the weighted average period over which this amount is expected to be recognized is 2.51 years. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the above paragraph and table. The expected term of the options was computed using the "plain vanilla" method as prescribed by the Securities and Exchange Commission Staff Accounting Bulletin 107 because the Company does not have sufficient data regarding employee exercise behavior to estimate the expected term. The volatility was determined by referring to the average historical volatility of a peer group of public companies combined with the Company's due to the lack of sufficient historical data of its stock price. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
During the nine months ended September 30, 2019, the Company granted 316,907 restricted stock units, which vest annually in four equal installments. The weighted average grant date fair value was $1.31 per unit. As of September 30, 2019, total compensation cost not yet recognized was $0.4 million and the weighted average period over which this amount is expected to be recognized is 3.8 years. No restricted stock units were vested as of September 30, 2019 and no units were granted prior to 2019.
Consulting Agreement
In 2017, the Company entered into a consulting agreement for its investor relations operations. The consulting agreement initially covered a period of twelve months from the commencement date of July 29, 2017 and was extended in April 2018 until March 31, 2019. Pursuant to the original consulting agreement, in exchange for the consulting services, the Company issued two warrants (collectively, the “Warrants”) to purchase 100,000 and 50,000 shares of common stock at exercise prices of $2.41 and $3.00 per share. Each of the Warrants vested over a 12-month period in equal monthly installments starting July 29, 2017, provided that the consultant was providing services to the Company pursuant to the consulting agreement on each vesting date. The Warrants became initially exercisable on August 8, 2017 and expire five years from the initial exercise date. In connection with the first extension of the consulting agreement, the Company issued the consultant a 3-year warrant to purchase 100,000 shares of common stock at an exercise price of $3.00 per share vesting in four quarterly installments. In addition, the Company paid $20,000 to the consultant per quarter pursuant to the first amendment to the consulting agreement. On July 8, 2019, the Company amended the existing consulting agreement for additional cash payments, with a right to cease cash payments by issuing the consultant a fully vested three-year warrant to purchase 150,000 shares of Company common stock, subject to NASDAQ listing of additional shares approval. On August 8, 2019, the Company elected to issue such warrant with an exercise price of $1.64. The Company recorded stock compensation expense for the non-employee consulting agreement of $0.1 million and $0.04 million for the three months ended September 30, 2019 and 2018, respectively, and $0.1 million for both the nine months ended September 30, 2019 and 2018.
$9 million Registered Direct Offering
In February 2018, the Company entered into a Securities Purchase Agreement with certain institutional investors for the sale of 4,290,000 shares of common stock, at a purchase price of $2.10 per share. Concurrently with the sale of the common stock, pursuant to the Purchase Agreement, the Company also sold warrants to purchase 2,145,000 shares of common stock. The Company sold the common stock and warrants for aggregate gross proceeds of approximately $9.0 million. The net proceeds from the transactions was approximately $8.2 million after deducting certain fees due to the placement agent and transaction expenses. Subject to certain beneficial ownership limitations, the warrants became exercisable on the six-month anniversary of the issuance date at an exercise price equal to $2.80 per share of common stock, subject to adjustments as provided under the terms of the warrants. The warrants are exercisable for five years from the initial exercise date. The closing of the sales of these securities under the Purchase Agreement occurred on February 21, 2018.
$2.3 million Registered Direct Offering
In June 2018, the Company entered into a definitive agreement with institutional investors for a registered direct offering of securities with gross proceeds of approximately $2.3 million. In connection with the offering, the Company issued 1,092,636 registered shares of common stock at a purchase price of $2.105 per share. Concurrently in a private placement, for each share of common stock purchased by an investor, such investor received from the Company an unregistered warrant to purchase 0.65 of a share of common stock. The warrants have an exercise price of $2.02 per share, became exercisable six months from the date of issuance, and will expire five years from the initial exercise date. Roth Capital Partners LLC served as sole placement agent for the offering.
$5.25 million Registered Direct Offering
In March 2019, the Company entered into an Underwriting Agreement (the "Underwriting Agreement") with Oppenheimer & Co. Inc. (the "Underwriter") relating to an underwritten offering (the "Offering") of 5,250,000 units (each a "Unit"), each unit consisting of (i) one share of the Company's common stock, and (ii) 0.5 of a warrant to purchase one share of common stock (each a "Warrant"). The public offering price of the Units was $1.00 per Unit, and the Underwriter agreed to purchase the Units from the Company pursuant to the Underwriting Agreement at a price of $0.93 per Unit. The Warrants included in the Units are immediately exercisable at a price of $1.10 per share, subject to adjustments in certain circumstances, and will expire five years from the date of issuance. The net proceeds from the transaction was approximately $4.7 million after deducting the underwriting discount and estimated offering expenses payable by the Company.
$15 million Registered Direct Offering
In April 2019, the Company entered into subscription agreements (each a "Subscription Agreement") with certain institutional investors (the "Investors") for the sale by the Company of 9,375,000 units (each a "Unit"), each Unit consisting of (i) one share of the Company's common stock, and (ii) 0.5 of a warrant to purchase one share of common stock (each a "Warrant"). The public offering price of the Units was $1.60 per Unit. The Warrants included in the Units are immediately exercisable at a price of $1.75 per share and will expire five years from the date of issuance. The net proceeds from the transaction was approximately $13.7 million after deducting the placement agent fees and estimated offering expenses payable by the Company.
Initial Public Offering Warrants
In connection with the Company's initial public offering completed in May 2016, the Company issued its underwriter a five-year warrant to purchase 107,802 shares of common stock at an exercise price of $7.50 per share.
6. Income Taxes
Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company does not expect to pay any significant federal, state, or foreign income taxes in 2019 as a result of the losses recorded during the three and nine months ended September 30, 2019 and the additional losses expected for the remainder of 2019 and cumulative net operating loss carryforwards. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some component or all of the benefits of deferred tax assets will not be realized. As a result, as of September 30, 2019, the Company maintained a full valuation allowance for all deferred tax assets.
The Company recorded an income tax benefit for the three and nine months ended September 30, 2019 of $0.2 million resulting in a quarterly effective tax rate of 5.2% and an annual effective rate of 1.4%. The total income tax benefit is comprised of research and development tax credits recoverable, associated with Moleculin Australia Pty Ltd., (MAPL), a wholly owned subsidiary formed in June 2018, related to preclinical development in Australia for WP1732, an analog of WP1066. Aside from the Australia tax credit, the Company has recorded no income taxes for the three and nine months ended September 30, 2019 and 2018. The income tax rates vary from the federal and state statutory rates primarily due to the change in fair value of the stock warrants and valuation allowances on the Company’s deferred tax assets. The Company estimates its annual effective tax rate at the end of each quarterly period. Jurisdictions with a projected loss for the year where no tax benefit can be recognized due to the valuation allowance could result in a higher or lower effective tax rate during a particular quarter depending on the mix and timing of actual earnings versus annual projections.
7. Commitments and Contingencies
In addition to the commitments and contingencies elsewhere in these notes, see below for a discussion of our commitments and contingencies as of September 30, 2019.
Lease Obligations Payable
Effective January 1, 2019, the Company adopted ASC 842, which requires recognition of a right-of use asset and a lease liability for all leases at the commencement date based on the present value of the lease payment over the lease term. In March 2018, the Company entered into a Lease Agreement (the “Lease”) which it uses for its corporate office space and headquarters. The term of the Lease began in August 2018 and will continue for an initial term of 66 months, which may be renewed for an additional 5 years. The Company is required to remit base monthly rent which will increase at an average approximate rate of 3% each year. The Company is also required to pay additional rent in the form of its pro-rata share of certain specified operating expenses of the Landlord. The leased space is located in Houston, Texas. The corporate office lease is classified as an operating lease.
In August 2019, the Company entered into an Amended Lease Agreement (the "Lab Lease") which it uses for lab space. The term of the Lease began in September 2019 and will continue for an initial term of 35 months, with no further right or option to renew. The Company is required to remit base monthly rent which will increase at an average approximate rate of 3% each year. The Lab Lease is classified as an operating lease. In August 2019, the Company entered into a sublease with Houston Pharmaceuticals, Inc. ("HPI"). The Company has granted HPI access to all of its Lab Lease space and HPI has agreed to pay the Company 50% of the Company's rent payable under the Lab Lease less 50% of any benefits from any sublease or other lab service agreement the Company may receive from its Lab Lease. Although HPI has access to the Company's Lab Lease space, it is the intent of the parties that they equally share the Lab Lease space for research purposes. The Company recorded approximately $3,400 in sublease income from the related party for the three and nine months ended September 30, 2019, respectively. Sublease income is recorded as other income on the Company's condensed consolidated statement of operations and comprehensive loss.
The Company recorded lease costs of $0.02 million and $0.03 million for the three and nine months ended September 30, 2019, respectively. The Company made an accounting policy election not to apply the recognition requirements to short-term leases. The Company recognizes the lease payments for short-term leases in profit or loss on a straight-line basis over the lease term, and variable lease payments in the period in which the obligation for those payments is incurred. The Company recorded total expenses for its short-term leases of $0.01 million and $0.04 million for the three and nine months ended September 30, 2019, respectively. The Company recorded lease costs for variable lease payments of $0.01 million and $0.02 million for the three and nine months ended September 30, 2019, respectively.
Other supplemental cash flow information for operating leases is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
20
|
|
|
$
|
41
|
|
|
Right-of-use assets obtained in exchange for lease liabilities
|
|
|
|
|
|
Operating leases
|
$
|
212
|
|
|
$
|
321
|
|
The minimum lease payments are expected to be as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
Minimum Lease Payments
|
|
2019 (remaining three months)
|
|
$
|
33
|
|
|
2020
|
|
135
|
|
|
2021
|
|
138
|
|
|
2022
|
|
105
|
|
|
2023
|
|
57
|
|
|
Thereafter
|
|
10
|
|
|
Total lease payments
|
|
478
|
|
|
Less: imputed interest
|
|
(74)
|
|
|
Present value of operating lease liabilities
|
|
$
|
404
|
|
Under the prior lease guidance, future minimum lease payments at December 31, 2018 under long-term leases for the five years ending December 31, 2019 through 2023 and thereafter are as follows (in thousands): $48, $53, $54, $55, $56, and $5, respectively.
As of September 30, 2019, the weighted average remaining lease term is 4.42 and 2.84 for the Lease and Lab Lease, respectively, and the weighted average discount rate is 9.6%. The interest rate implicit in lease contracts is typically not readily determinable and as such, the Company uses an incremental borrowing rate based on a peer analysis using information available at the commencement date, which represents an internally developed rate that would be incurred to borrow, on a collateralized basis, over a similar term, an amount equal to the lease payments in a similar economic environment. During the nine months ended September 30, 2019, in addition to the initial adoption of the lease standard, the Company amended its Lab Lease which required additional right of use assets and liabilities to be recorded.
MD Anderson
Under agreements associated with Annamycin, the WP1122 Portfolio, and the WP1066 Portfolio, which includes WP1732, all described below, the Company is responsible for certain license, milestone and royalty payments over the course of the agreements. Annual license fees can cost as high as $0.1 million depending upon the anniversary. Milestone payments for the commencement of phase II and phase III clinical trials can cost as high as $0.5 million. Other milestone payments for submission of an NDA to the FDA and receipt of first marketing approval for sale of a license product can be as high as $0.6 million. Royalty payments can range in the single digits as a percent of net sales on drug products or flat fees as high as $0.6 million, depending upon certain terms and conditions. Not all of these payments are applicable to every drug. Total expenses under these agreements were $0.1 million and $0.1 million for the three months ended September 30, 2019 and 2018, respectively, and $0.2 million and $0.2 million during the nine months ended September 30, 2019 and 2018, respectively. On June 29, 2017, the Company entered into an agreement with MD Anderson licensing certain technology related to the method of preparing Liposomal Annamycin.
WP1122 Portfolio
The rights and obligations to an April 2012 Patent and Technology License Agreement entered into by and between IntertechBio and MD Anderson (the “IntertechBio Agreement”) have been assigned to MBI. Therefore, MBI has obtained a
royalty-bearing, worldwide, exclusive license to intellectual property, including patent rights, related to our WP1122 Portfolio and to our drug product candidate, WP1122.
WP1066 Portfolio
The rights and obligations to a June 2010 Patent and Technology License Agreement entered into by and between Moleculin LLC and MD Anderson (the “Moleculin Agreement”) have been assigned to MBI. Therefore, MBI has obtained a royalty-bearing, worldwide, exclusive license to intellectual property rights, including patent rights, related to our WP1066 drug product candidate. In consideration, MBI must make payments to MD Anderson including an up-front payment, milestone payments and minimum annual royalty payments for sales of products developed under the license agreement. Annual Maintenance fee payments will no longer be due upon marketing approval in any country of a licensed product. One-time milestone payments are due upon commencement of the first Phase III study for a licensed product within the United States, Europe, China or Japan; upon submission of the first NDA for a licensed product in the United States; and upon receipt of the first marketing approval for sale of a licensed product in the United States. The rights the Company has obtained pursuant to the assignment of the Moleculin Agreement are made subject to the rights of the U.S. government to the extent that the technology covered by the licensed intellectual property was developed under a funding agreement between MD Anderson and the U.S. government.
MBI entered into an out-licensing agreement with Houston Pharmaceuticals, Inc. (“HPI”), pursuant to which it granted certain intellectual property rights to HPI, including rights covering the potential drug candidate, WP1066 (“HPI Out-Licensing Agreement”). Under the HPI Out-Licensing Agreement the Company was required to make quarterly sponsored research payments totaling $0.75 million for the first twelve quarters following the effective date, of the HPI Out-Licensing Agreement, or May 2, 2016, in consideration for the right to development data related to the development of licensed products. Notwithstanding the Company's obligation to make the foregoing payments, the HPI Out-Licensing Agreement did not obligate HPI to conduct any research or to meet any milestones. Upon payment in the amount of $1.0 million to HPI within three years of the effective date of the HPI Out-Licensing Agreement ("HPI Option Repurchase Payment") MBI regained all rights to the licensed subject matter and rights to any and all development data and any regulatory submissions including any IND, NDA or ANDA related to the licensed subject matter and can end the license without any other obligation other than the aforementioned quarterly sponsored research payments. The option repurchase payment was paid on April 30, 2019 for $1.0 million and, accordingly, the HPI Out-Licensing Agreement was terminated. The $1.0 million payment was accrued and expensed under "Research and development" in the second quarter of 2018. Total expenses related to HPI were $0.0 million and $0.1 million for the three months ended September 30, 2019 and 2018, respectively, and $0.1 million and $1.2 million for the nine months ended September 30, 2019 and 2018, respectively.
In February 2018, MBI entered into a license agreement with MD Anderson covering a new group of molecules recently discovered in connection with research it has been sponsoring there called WP1732, a part of the WP1066 Portfolio.
Sponsored Research Agreements with MD Anderson
In January 2017, MBI amended its Sponsored Laboratory Study Agreement with MD Anderson where it was extended to the end of October 2018. In December 2017, MBI extended this Agreement until the end of October 2019 for total payment amount of $0.3 million spread over that period of time. In September 2018, the Company extended this Agreement until the end of October 2020 for total payment amount of $0.4 million spread over that period of time. In June 2019, the Company amended the Agreement to support the continuation of the project for total payment amount of $0.4 million. In October 2019, the Company amended the agreement until the end of October 2021 for a total additional payment amount of $0.4 million. The expenses recognized under the MD Anderson agreement with regards to the Sponsored Laboratory Study were $0.2 million and $0.1 million for the three months ended September 30, 2019 and 2018, respectively, and $0.4 million and $0.3 million, for the nine months ended September 30, 2019 and 2018, respectively.
Other Licenses
Dermin
In 2015, the Company obtained the rights and obligations for certain patent and technology development and license agreements with Dermin sp. z o.o. (“Dermin”). In connection with such agreements, certain intellectual property rights related to Annamycin, our WP1122 portfolio, and the Company's WP1066 portfolio were licensed to Dermin and Dermin was granted a royalty-bearing, exclusive license to manufacture, have manufactured, use, import, offer to sell and/or sell products in the field of human therapeutics under the licensed intellectual property. With respect to Annamycin, the license is limited to the
countries of Poland, Ukraine, Czech Republic, Hungary, Romania, Slovakia, Belarus, Lithuania, Latvia, Estonia, Netherlands, Turkey, Belgium, Switzerland, Austria, Sweden, Greece, Portugal, Norway, Denmark, Ireland, Finland, Luxembourg, Iceland, Kazakhstan, Russian Federation, Uzbekistan, Georgia, Armenia, Azerbaijan and Germany; provided that the Company has the right to remove Germany from the list of covered territories with a $0.5 million payment. With respect to WP1122, the license is limited to the countries of Belarus, Russia, Kazakhstan, Uzbekistan, Turkmenistan, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Ukraine. With respect to WP1066, the license is limited to the countries of Belarus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Ukraine. In each case, Dermin agreed to pay a royalty for the sale of any licensed product in the licensed territories and agreed to pay all out-of-pocket expenses incurred in filing, prosecuting and maintaining the licensed patents for which the license has been granted in the licensed territories. Dermin also agreed to provide a percentage of certain consideration that Dermin receives pursuant to sublicense agreements. In July 2019, Dermin assigned its rights under the foregoing license agreements to an affiliated entity, Exploration Invest Pte Ltd. (“Exploration”). On July 30, 2019, the Company and Exploration entered into a License Modification Agreement pursuant to which the Company agreed to issue Exploration shares of Company common stock valued at $0.5 million (based on the greater of the closing price of the common stock on the date of the agreement or the 10-day average closing price prior to the date of the agreement) in exchange for the modifying the license agreements to: (i) limit the licensed territory solely to Poland; and (ii) limit the patent rights and technology rights licensed to Exploration to the patent rights and technology rights that existed on the date the original license agreements were entered into with Dermin. On August 8, 2019, the Company issued 429,978 shares of Company common stock to Exploration to satisfy this commitment.
WPD Pharmaceuticals
On February 19, 2019, the Company sublicensed certain intellectual property rights, including rights to Annamycin, its WP1122 portfolio, and its WP1066 portfolio to WPD Pharmaceuticals sp. z o.o. (“WPD”) (the “WPD Agreement”). WPD is affiliated with Dr. Waldemar Priebe, one of the Company's founders and largest shareholder. Under the WPD Agreement, the Company granted WPD a royalty-bearing, exclusive license to research, develop, manufacture, have manufactured, use, import, offer to sell and/or sell products in the field of human therapeutics under the licensed intellectual property in the countries of Germany, Poland, Estonia, Latvia, Lithuania, Belarus, Ukraine, Moldova, Romania, Armenia, Azerbaijan, Georgia, Slovakia, Czech Republic, Hungary, Uzbekistan, Kazakhstan, Greece, Austria, Russia, Netherlands, Turkey, Belgium, Switzerland, Sweden, Portugal, Norway, Denmark, Ireland, Finland, Luxembourg, Iceland (“licensed territories”), provided that the Company has the right to buyback Germany from the licensed territories by making a payment $0.5 million. On July 30, 2019, the Company entered into the aforementioned July 30, 2019 agreement with Dermin that satisfied the foregoing buyback right, and as such, Germany is no longer considered part of the licensed territories.
In consideration for entering into the WPD Agreement, WPD agreed that it must use Commercially Reasonable Development Efforts to develop and commercialize products in the licensed territories. For purposes of the WPD Agreement, the term “Commercially Reasonable Development Efforts” means the expenditure by or on behalf of WPD or any of its affiliates of at least: (i) $2.0 million during the first two years of the agreement on the research, development and commercialization of products in the licensed territories; and (ii) $1.0 million annually for the two years thereafter on the research and development of products in the licensed territories. This license is subject to the terms in the prior agreements entered into by the Company with Dermin and MDA.
WPD is actively seeking Polish government grants for research involving licensed drug candidates.
Prior to approval of the WPD Agreement, the Company's board of directors received a fairness opinion from Roth Capital Partners, LLC that stated that it was their opinion that the consideration the Company will receive from WPD pursuant to the WPD Agreement is fair, from a financial point of view, to the Company.
Animal Life Sciences
On February 19, 2019, the Company sublicensed certain intellectual property rights, including rights to Annamycin, its WP1122 portfolio, and its WP1066 portfolio in the field of non-human animals to ALI (the “ALI Agreement”). ALI is affiliated with Dr. Waldemar Priebe, one of its founders and its largest shareholder. Under the ALI Agreement, the Company granted ALI a worldwide royalty-bearing, exclusive license to research, develop, manufacture, have manufactured, use, import, offer to sell and/or sell products in the field of non-human animals under the licensed intellectual property. This license is subject to the terms in the prior agreements entered into by the Company and MDA. Under the ALI Agreement, the Company has the right to name an observer to ALI's board of directors. On August 8, 2019, the Company named its Chairman and CEO Walter V. Klemp to that position.
Since ALI and WPD are beginning the process to develop and commercialize products using the sublicensed intellectual property rights, the Company is currently unable to predict whether ALI and WPD will be successful in developing such products or when the Company may recognize royalty revenues related to such products.
Employment Agreements
The Company has agreements with certain employees to provide certain benefits in the event of termination where the base salary and certain other benefits would aggregate approximately $0.9 million using the rate of compensation in effect at September 30, 2019.
8. Subsequent Events
In addition to the subsequent events discussed elsewhere in these notes, no other events occurred.